Will the Fed start controlling government bond yields?

The two-day meeting of the American Fed will begin tonight. Although the bank does not have much room to adjust monetary policy at the moment and is not yet planning to do so, rising government bond yields have already gained the bank's attention and will be the hottest topic of the meeting. Above all, the bank can intervene verbally and try to squeeze yields, the question remains - will it come to this?

The problem of technological stocks

Rising yields on US government bonds have been the hottest topic in recent weeks, and investors are constantly monitoring their development. The entire $ 21 trillion bond market has been much more volatile since the end of January, causing stock market turbulence as well. Yields rise as the price of a bond falls and vice versa. The benchmark is the yield on government bonds with a ten-year maturity, which reached a thirteen-month high above 1.6%. This paralyzed especially technological stocks, which have long benefited from low rates in the economy.

Chart: Development of ten-year US bond yields (source: cnbc.com)
Development of ten-year US bond yields (source: cnbc.com)

Good news for the economy

Yield growth reflects the positive mood among investors who no longer see too many risks and therefore it is not so important for them to have such a large exposure in government bonds. Expectations about the pace of recovery of the US economy and a possible return of inflation are also positive. Nevertheless, concerns that the Fed will start raising interest rates earlier than originally promised are also starting to appear. Inflation expectations are now at their highest level since 2008, but the Fed has repeatedly stated that it is not at all afraid of inflation.

Tolerant reactions of the Fed

Jerome Powell has once again dispelled speculation this month that the Fed would soon tighten monetary policy. However, investors interpreted the reluctance of the central bank to have a mechanism in place to control rising yields as damaging to yields, which resulted in their continuous growth. Even now, however, no significant change in rhetoric can be expected, as it has been said several times since that rising yields are good news and the bank is only monitoring the current growth rate. However, a number of banks are adjusting their target for this year's yield, and the general consensus suggests that ten-year yields will continue to grow towards 2%. Will it be a problem for the bank?

The bank will most likely want to tolerate higher yields, the attempt will further improve the fundaments in the economy and the conditions for further expansion will be favorable. What remains is the risk in the form of faster inflation growth than the Fed expects. Various indicators suggest that the economic recovery will be much quicker due to faster vaccinations and strong fiscal stimulus, which may bring inflation above levels that are still acceptable to the bank.

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